Feb 2014 - Misleading GDP?

GDP Numbers Misleading?

The equities markets took a material tumble in early February 2014, citing signs of China slowing down, with its official PMI figure down by 0.5 from 51.0 to 50.5 when it was released on 1 Feb (still mirroring the earlier HSBC estimates that are 1.0 lower, and which fell from 50.0 to 49.5)

The equities markets took a material tumble in early February 2014, citing signs of China slowing down, with its official PMI figure down by 0.5 from 51.0 to 50.5 when it was released on 1 Feb (still mirroring the earlier HSBC estimates that are 1.0 lower, and which fell from 50.0 to 49.5)

HSBC apparently uses a different method to determine its estimate of China's PMI that appears to be based on the 3rd week of a month, and just how China manages to calculate its numbers so fast anyway is anyone's guess. The PMI is apparently usually lower in January due to the ~ one week long Lunar new year holiday, but this was ignored, as the market expects (wants?) China to show signs of weakening.The PMI number was seen as a further reflection of China's slowdown as China's GDP in 2013 was commented as collapsing (from 7.8% in 2012 to 7.7% in 2013), its lowest growth rate since 1999.As a presenter at a conference in 2013 commented, China's GDP numbers are just a guideline, being a weighted average of the individual GDPs of its provinces, such that a target of 7.5%pa means that it should be somewhere between 7% and 8%pa.It should be noted that I am not an economist. The following comments are based on page 17 of a China Daily 30 January 2014 article, which suggested that like the US, China should be changing the weightings of its 4 main underlying numbers used to derive its GDP on a more regular basis, to reflect "structural changes".It may be common knowledge to an economist and others, or maybe I failed to listen in a relevant lecture, but when I have looked at tables of GDP numbers, what I did not realise was that the underlying weighting of numbers used to produce them can vary from country to country and from year to year !The USA for example in 2008 used weightings of investment (15%), govt consumption/spending (20%), household consumption/spending (70%), and exports (-5%). Which changed in 2012 to 16%, 20%, 68% and -4% respectively. And changed again in July 2013 (without details in the article) to reflect "structural changes" and result in a GDP of 3.6%.The weightings make more sense of the 20 December 2013 comment that US GDP rose to 4.1% from July through September 2013 due to higher consumer spending, compared to the 2.5% GDP growth achieved in the second quarter of 2013 (with possibly a different weighting). The 4.1% rate was the fastest in the past two years (since 2011), and higher than expected.In contrast, China's GDP in 2008 used weightings of investment (42%), govt consumption/spending (13%), household consumption/spending (35%), and exports (9%). Which changed in 2012 to 47%, 13%, 35% and 4% respectively.The article did not specify whether any changes to China's weightings for its GDP numbers occurred in 2013, but suggested/inferred that individual provinces should be adjusting their own weightings in their GDP forecasts for the coming year.It can be seen that there were dramatic differences in the weightings of the underlying numbers for GDP between China and the USA in 2012, viz : investment (47% vs 16%), govt consumption / spending (13% vs 20%), household consumption / spending (35% vs 68%), and exports (4% vs -4%).The China daily article also gave a comparison as shown in Table 1, of the GDP of some of its Provinces in 2013 compared to those achieved by various countries in the world in 2012. What weightings those countries use to derive their GDP numbers is unknown, it was also remarked that China has benefited from the strength in Chinese yuan (or RMB) compared to the US$.The obvious conclusion to this is to take care when comparing GDP numbers from country to country and from year to year, and whether the 0.1% fall in China's GDP from 2012 to 2013 (interpreted by the market as evidence showing a slowing in growth, being from 7.8% to 7.7%) was in fact partly due to a change in the weightings of the underlying numbers.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.Table 1. GDP Comparison of Selected Chinese Provinces and Individual Countries